The Localization of Physical AI: Why the U.S. Defense Supply Chain is Moving to Japan
U.S. defense contractors are increasingly seeking to localize physical manufacturing of autonomous systems in allied nations to mitigate supply chain risks tied to foreign adversaries.
This shift comes as the U.S. government implements stricter procurement rules. Effective June 2026, Section 805 of the Fiscal Year 2024 National Defense Authorization Act prohibits the Department of Defense from procuring goods or services from entities on its Section 1260H list of Chinese military companies [1]. By 2027, this ban expands to indirect suppliers [1]. Concurrently, a proposed rule to the Defense Federal Acquisition Regulation Supplement aims to extend Foreign Ownership, Control, or Influence disclosure requirements to unclassified contracts over $5 million [2].
These regulations address the defense industry’s reliance on Chinese components. China controls nearly 90% of the global commercial drone market and manufactures most key hardware, including airframes, batteries, and radios [3]. This dependency has hindered the Pentagon’s Replicator initiative, which seeks to field thousands of autonomous systems to counter China [3].
Venture capital firm Sozo Ventures recently highlighted this trend on LinkedIn, responding to a Reuters report that U.S. defense firm Anduril Industries is negotiating to acquire Nissan Motor’s Oppama assembly plant near Tokyo [4] [5]. “Software may be developed abroad, but the physical AI technologies of the future will build for their customers in their own country, especially when it comes to strategic industries like defense,” the firm posted [4].
Anduril, founded by Palmer Luckey, has aggressively pursued localization in Japan. In December 2025, the company unveiled the Kizuna drone, built entirely with Japanese components to meet domestic-content requirements [5] [6]. Anduril plans to invest hundreds of millions to billions of dollars to establish an “Arsenal J” manufacturing hub in Japan, focusing on integrated air and missile defense, maritime autonomy, and scalable mass production [6] [7].
Japan is actively courting this investment. Prime Minister Sanae Takaichi’s government recently announced a target to mobilize $65 billion in public and private investment for physical artificial intelligence by 2040 [8]. The 2026 Defense White Paper emphasized the need to build a robust defense industry and utilize commercial dual-use technologies to address the severe security environment posed by China and North Korea [9].
In April 2026, Japan significantly relaxed its defense export restrictions, abolishing the “five categories” rule that limited transfers to non-lethal items [10]. This policy shift allows Japan to export weapons jointly developed with other nations and products manufactured under license, aiming to boost economies of scale for domestic manufacturers [10].
The convergence of U.S. supply chain security mandates and Japan’s defense industrial expansion creates a strategic opportunity. As Luckey noted, “Japan is one of the only countries that can do it all on their own” [6].
AI generated
References
[1] Federal News Network. “DoD issues guidance as ban on Chinese companies takes effect.” July 2, 2026. DoD issues guidance as ban on Chinese companies takes effect | Federal News Network
[2] Wiley Rein LLP. “DOD Proposes Expanding FOCI Requirements to Cover Unclassified Contracts.” May 13, 2026. DOD Proposes Expanding FOCI Requirements to Cover Unclassified Contracts: Wiley
[3] Forbes. “Silicon Valley’s Military Drone Companies Have A Serious ‘Made In China’ Problem.” April 16, 2025. Silicon Valley’s Military Drone Companies Have A Serious Chinese Parts Problem
[4] LinkedIn. “Sozo Ventures post on Anduril and Nissan.” August 2026. Japan to build AI tech for domestic defense industries | Sozo Ventures posted on the topic | LinkedIn
[5] Reuters. “U.S. defence firm Anduril in talks for Nissan plant to build drones in Japan, sources say.” June 25, 2026. https://www.reuters.com/world/asia-pacific/us-defence-firm-anduril-talks-nissan-plant-build-drones-japan-sources-say-2026-06-25/
[6] Coral Capital. “Accelerating Japan, With Anduril.” June 10, 2026. Accelerating Japan, With Anduril | Coral Capital
[7] Anduril Industries. “Anduril Expands to Japan, Advancing its Mission to Transform Allied Defense.” December 3, 2025. Anduril Expands to Japan, Advancing its Mission to Transform Allied Defense | Anduril
[8] Nikkei Asia. “Japan targets $65bn in public-private physical AI investment by 2040.” June 20, 2026. Japan targets $65bn in public-private physical AI investment by 2040 - Nikkei Asia
[9] U.S. Naval Institute News. “Japan’s 2026 Defense White Paper Digest.” August 4, 2026. https://news.usni.org/2026/08/04/japans-2026-defense-white-paper-digest
[10] International Institute for Strategic Studies. “Japan loosens the reins on defence exports.” April 27, 2026. https://www.iiss.org/online-analysis/online-analysis/2026/04/japan-loosens-the-reins-on-defence-exports/